Under prior law, a portion of a child’s unearned income was taxed at the parent’s marginal rate, which could be as high as 39.6%. Unearned income included capital gains, dividends, and interest income. Earned income from a job or self-employment income, however, was never subject to the kiddie tax rules. This methodology meant that a if a child had sufficient amount of unearned income, that child’s tax return could not be filed until the parent’s tax return was completed, and if there were multiple children, all of those returns had to be completed at the same time.
Under the TCJA, the child’s unearned income is now taxed at the federal income tax rates applicable to trusts and estates rather than at their parent’s marginal tax rate. Because the tax rates for trusts and estates hit the top tax rate of 37% at lower levels of income than the tax rates for individuals, there is the potential for the child’s tax liability under the TCJA to be higher than it would have been under prior law.
Fortunately, it is only the applicable rates that were changed by the TCJA–all other rules regarding the kiddie tax computation are the same as before–meaning the same techniques for reducing kiddie tax under prior law are still available under the TCJA. Those rules are as follows:
- The child can still claim a standard deduction equal to the greater of (a) $1,050 or (b) earned income plus $350, not to exceed $12,000.
- The kiddie tax still applies to a child who does not file a joint return for the year, and one or both of the child’s parents are alive at the end of the year.
- The child’s unearned income exceeds $2,100 (for 2018), and the child has positive taxable income after subtracting the standard deduction and any other applicable deductions. Note that only the excess unearned income will be taxed at the trust and estate tax rates.
- The child falls under one of these three age categories as of the last day of the tax year:
- Age 17 or younger – kiddie tax applies if #1 - #3 above are satisfied.
- Age 18 – kiddie tax applies if #1 - #3 above are satisfied and the child does not have earned income that exceeds half of their support.
- Age 19-23 – kiddie tax applies if #1 - #3 above are satisfied, the child does not have earned income that exceeds half of their support, and the child is a full-time student for at least 5 months of the year.